Question

whatbis time value of money?is there a time value woyld be used in the amount recorded on the books account?

Answer 1

Time Value Of Money- Time value tells the value and purchasing power of money that decreases after a period of time because of inflation. This concept says that today's $100 will not worth same after two years or so, its purchasing power will decrease, if you can buy 50 oranges in $100 today, you will be only buying 45 oranges in $100 after 2 years but if you invest the money, it will be worth more than today as it is compounded and interest is calculated on the amount.

Present value and futures value are the concepts of time value of money. If you want to calculate real worth of $100 after 5 years then you have to use the inflation rate to calculate the sum of amount.

Example: $1000 after 5 years when interest rate is 8%.

FV = PV (1+r)ⁿ

FV = 1000 (1+.08)⁵

FV = $1469.328

Time value itself is not recorded in the books of accounts only its effect that is calculated through future value and present value is recorded. Time value concept is very important and used in financial management to know the actual worth of money.